Clinton and surrogates criticize share buybacks — even as the trend reverses

Sen. Mark Warner and Democratic presidential nominee Hillary Clinton have been on the same page on issue of share buybacks.

Democratic presidential candidate Hillary Clinton and her progressive surrogates are making political hay out of the billions of dollars’ worth of share buybacks they say are made only to please “activist” hedge funds.

In several speeches and in a bill introduced in the Senate in March, left-leaning Democrats are supporting Clinton’s message by repeating the theme that activist hedge funds are focused on their own wealth instead of on paying employees more and investing for long-term growth.

That criticism may be coming a bit late in the cycle. The enormous share buybacks and generous dividends that politicians, and some large investors, say strip companies of funds to invest in employees and future growth are already slowing. A recent Goldman SachsGS, -0.71%research report said high share prices have made it unattractive for companies to buy their own stock, even if they take advantage of superlow interest rates by borrowing to do it.

Share-buyback announcements by companies during the second-quarter earnings season hit their lowest level since mid-2012. As MarketWatch has reported, TrimTabs, the independent institutional research firm, calculated that buybacks totaled $376.5 billion in the first seven months of 2016, down 21% from the same period last year.

Clinton could be tempted to take credit for the reversal. She announced her economic plan on July 24 of last year, and it included a recommendation for heightened scrutiny of “excessive buybacks that could take resources away from long-term investment.” She blamed so-called activist investors, whom Clinton described as too often “focused on short-term profits at the expense of future growth.”

Sens. Tammy Baldwin, a Democrat from Wisconsin, and Jeff Merkley, a Democrat from Oregon, introduced legislation in March called the Brokaw Act, which they say will make it harder for activist hedge funds to “exploit healthy companies rather than invest in their future.” The bill has the support of Sen. Elizabeth Warren, a Massachusetts Democrat who’s been a frequent Wall Street critic, and Sen. Bernie Sanders, the Vermont independent who challenged Clinton for the Democratic nomination.

The press release introducing the Baldwin-Merkley bill blamed activist hedge funds for leading “the short-termism charge in our economy.” Activists make demands of the companies that benefit themselves rather than the long-term growth of the company. Share buybacks and higher dividends are two of the most common demands they make, even at the cost of investment in workers and assets that could promote a company’s long-term interests.

The Brokaw Act is a less aggressive clampdown than some, like Mike Konczal, a senior fellow at the progressive Roosevelt Institute, would have liked. Konczal, who co-authored a paper in November 2015 proposing more significant actions such as limiting stock buybacks and executive pay, is quoted on Merkley’s site as saying the bill is a “really important first step.”

The legislation, however, may not achieve the goals of those who criticize activist investors, according to a client note from law firm Jenner and Block. Rather than curbing buybacks, dividends and high debt, the proposals simply make it more difficult for an investor to accumulate enough shares to have influence over how companies are run, according to the Jenner and Block note.

The business of the Senate may have slowed for the summer, but candidate Clinton is not letting the issue go. She repeated the anti-buyback theme during a campaign stop in Raleigh, N.C., in June. Instead of raising wages or investing in research and development, executives, Clinton told the crowd, use share buybacks or dividends to send cash to top, institutional shareholders.

A recent survey of corporate executives, she said in the speech, revealed “more than half would hold off on making a successful long-term investment — maybe in their workers, or plant equipment, or research — if it meant missing a target in the next earnings report.”

Sen. Mark Warner is also keeping the issue warm until legislators can get back to pushing the bill through to passage. In an interview with the editorial board of the Roanoke Times published Sunday, the Virginia Democrat bemoaned the fact that instead of 50% of corporate profits going back into a business, now “95% of corporate profits are going into stock buybacks or dividends.”

Activist investors are taking the potential threat to their business model seriously. In May, some of the biggest ones formed a Council for Investor Rights and Corporate Accountability, or CIRCA. Typically ultracompetitive investors William Ackman of Pershing Square Capital, Daniel Loeb of Third Point Capital, Paul Singer of Elliott Associates, Barry Rosenstein of Jana Partners and Carl Icahn of Icahn Enterprises have joined together to lobby politicians, and the public, because they believe that “a well-functioning system of checks and balances between boards of directors and shareholders is fundamental to long term economic growth and U.S. prosperity.” They’ve hired lobbyists including the former chief of staff to then–House Majority Whip Eric Cantor, a Virginia Republican.

In a flurry of press since its formation, CIRCA has argued that short-term shareholders are “entitled to the same voice in a company’s governance as obviously more virtuous and deserving long-term holders.” They also cite academic studies that show, on average, activist investors maintaining their position for a matter of years, not months. The issue, according to Charles Nathan, writing in Harvard Law School’s Forum on Corporate Governance and Financial Regulation, “is not the duration of time required for implementation, but rather the value creation potential of the program.”

Francine
McKenna

Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.